This paper draws on a survey of consumers' willingness to pay surcharges to use
debit cards and credit cards, rather than cash. Just as the price a consumer
is willing to pay for a good or service is indicative of the value he/she places
on that item, the willingness to pay a surcharge to use a payment method reflects
that method's value to that consumer, relative to any alternatives.

We find a wide dispersion in the willingness to pay for the use of cards. Around
60 per cent of consumers are unwilling to pay a 0.1 per cent surcharge, which
suggests that for these individuals, the net benefits of cards are very small
or that cash is actually preferred. At the other end of the distribution, some
individuals (around 5 per cent) are willing to pay more than a 4 per cent surcharge,
indicating they place a substantial value on paying using cards. On average,
consumers have a higher willingness to pay for the use of credit cards than
debit cards. This difference can be viewed as the additional value placed on
the non-payment functions – rewards and the interest-free period –
of credit cards. We estimate that on average credit card holders place a value
of 0.6 basis points on every 1 basis point of effective rewards rebate.

Based on the survey data and information on the costs to merchants of accepting payment
methods, we can predict the mix of cash, debit card and credit card payments
chosen by consumers under different levels of surcharging and explore the implications
for the efficiency of the payments system. In particular, the consumer surplus
in a scenario where merchants do not surcharge and the costs of all payment
methods are built into retail prices can be compared with that where merchants
surcharge based on payment costs and retail prices are correspondingly lower.
Our findings suggest that cost-based surcharging leads to some consumers switching
to less costly payment methods, resulting in greater efficiency of the payment
system and an increase in consumer surplus of 13 basis points per transaction.